Market eyes a road to recovery, but sees pot holes, land mines and maybe even a cliff

The road back to normality started this week as Covid-19 infections faded, but shrewd investors will be watching carefully for potholes while also recognising that the smoothest ride will be on a street paved with gold...
1st May 2020
Tim Treadgold

The road back to normality started this week as Covid-19 infections faded, but shrewd investors will be watching carefully for potholes while also recognising that the smoothest ride will be on a street paved with gold.

Encouraging as the public health news might be, the reality is that the global economy has taken a fearsome pounding with a very real risk of regression into extended lockdowns and double-dip downturns for countries which rush their return.

Those potential problems lie ahead. In the meantime, there is the good news of the Australian stock market which rose by 4.6% this week (as measured by the all ordinaries index), taking it to a six-week high, and up 21.5% on the late-March low.

Bizarre as it might sound, that rise in the all ordinaries since March 23 means the ASX has entered a bull market, which is the technical definition of a rise of 20% from the previous low point, a piece of statistical nonsense which deserves being called bull.

Widespread rises among small-to-mid-tier miners buoyed confidence in the resources sector with oil stocks joining in the recovery as the U.S. oil price jumped by an eye-catching 30%. Local oil leader Woodside is up 10.5% since the start of the week.

But it was gold which really led the way as the metal/currency held on to a price above $US1700 an ounce and a surprisingly large number of gold stocks rose to 12-month share-price highs during the week.

Silver Lake reached $2.06 before fading to $1.98. Oklo Resources touched 34c and then slipped back to 32c, and Saracen, which rose to $4.56 after a releasing a strong quarterly report before easing to $4.36.

Before looking at more detail of the week’s trading and news events, it’s worth taking a closer look at those potential potholes in the road to recovery because markets never move up in a straight line after a major wealth-destroying event -  and Covid-19 is the biggest wealth destroyer since the 1930s.

Three issues which investors need to watch carefully are:

  • The return of inflation which, if allowed to rise too quickly, could become a wealth destroyer as potent as Covid-19.
  • A currency shift from tailwind to headwind with the Australian dollar up 18% in less than two months, rocketing off a low of US55 cents to US65c.
  • Hints of a bear-market trap developing in base metals where prices have risen strongly despite mixed signals from China and other major markets.

Inflation, which failed to appear after the 2008 global financial crisis, is moving up this time because central-bank cash is being dumped into the pockets of consumers rather than remaining stuck in commercial banks.

The March inflation figure of 2.2% was the highest monthly reading since late 2014 and the first time it has been above 2% in two years. Some economists see inflation reaching 10% next year.

The currency shift has already started to effect local commodity prices with gold the yardstick because while the metal is up in U.S. dollar terms over the past week, it’s down in Australian dollars.

Macquarie Bank used currency moves to downgrade its investment recommendations on a number of mining companies, including Alumina, New Hope, Newcrest, Regis, St Barbara and Silver Lake.

The base metal bear trap is one to watch very carefully because while China has reported that its manufacturing sector has returned to pre-crisis output levels, consumer demand has not, nor have exports to the rest of the world, a trend which points to stockpiling before a production downturn which will eventually find its way into metal prices.

Credit Suisse, an investment bank, warned during the week that the oil-price crash has pushed down the cost of producing metals such as copper and zinc which could see marginal mines continue producing even as prices fall, ensuring over-supply and the springing of the bear trap on investors who let their enthusiasm run wild.

Gold performed its contrary trick on cue, driven by a range of factors, including fear of future inflation, and the hunt by investors for a safe haven.

Analysts at Citi, an investment bank, said in a research report that another $US5.8 billion flowed into gold-backed exchange-traded funds this week, taking the total gold-linked inflow for the year so far to $US31.4 billion.

Quarterly reports filled most of the space in the announcements section of the Australian stock exchange during the week with reports of significance including:

  • Saracen Mineral Holdings delivering record gold production of 158,000 ounces at an all-in sustaining cost of $A1133/oz.
  • Northern Star reporting a “difficult” quarter affected by Covid-19 which saw the production of 237,000oz of gold at an all-in cost of $A1590.
  • Regis poured 86,300oz at an all-in cost of $A1174/oz, and
  • St Barbara produced 91,547oz at an all-in cost of $A1405/oz, and said outside consultants had been called in to advise the company on future operations.

The rush to raise fresh capital ahead of what could be a slow recovery saw Newcrest join Australia’s major banks with a $1.1 billion issue of new shares to help fund a gold-financing deal in Ecuador.

ASX-listed companies have now raised a record $12 billion in April alone, a measure of the concern about the outlook at a corporate level.

Other newsworthy events and reports of interest during the week included:

  • West African Resources striking a deal to buy a 1.1 million-ounce gold deposit for $US45 million in Burkina Faso. The Toega deposit is just 14 kilometres from West African’s flagship Sanbrado mine. On the market, West African added 12c to 72c.
  • Chalice Gold continued its strong upward run, adding another 6c to $1.13 after releasing an optimistic quarterly report which focussed on its exciting Julimar nickel-palladium discovery close to Perth.
  • GTI Resources joined the mini-rush into uranium with a share-price rise of 44% from 0.9c to 1.3c after announcing the start of testing the high-grade potential of a uranium project in the U.S. State of Utah.
  • Salt Lake Potash said in its March quarterly that it was on budget and on schedule with its Lake Way project in WA. On the market, the stock added 1c to 34c but the stockbroking firm of Canaccord Genuity published an updated research note which valued Salt Lake at $1.30, a country mile above the market but also a downgrade on the broker’s previous price tip of $1.57.
  • Saturn Metals added 6c to 44c after announcing a second joint venture in the West Wyalong goldfield in NSW.
  • Fortescue Metals rose by 70c to $12.22 after releasing a strong March quarter report and the achievement of a net cash position with $4.2 billion in the bank, ahead of net debt which stood at $4 billion.
  • Pilbara Minerals reported a solid March quarter while the lithium market remained in the doldrums. The stock added 2c to 22c, close to half the 40c price target set by Credit Suisse.
  • Bellevue Gold reported that resources increased 23% to 2.2 million ounces at its namesake project in WA. On the market the stock slipped 2c lower to 59c but Macquarie Bank stuck with a price target of 90c, and
  • Core Lithium added 0.2c to 4c, but not because of its lithium interests. The price mover was an announcement of gold potential in its Northern Territory tenements.

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